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Meetings of Board and its Powers


Question 1
The Board of directors of ABC Ltd. met thrice in the year 2014 and the 4th Meeting, though
called, could not be held for want of quorum.
Examine with reference to the relevant provisions of the Companies Act, 2013, Whether any
provisions of the Companies Act, 2013 have been contravened?
Answer
In terms of section 173(1) of the Companies Act, 2013, a company must hold a minimum
number of four meetings every year of its Board of directors in such a manner that not more
than 120 days shall intervene between two consecutive meetings of the Board.
Further, the proviso to this subsection provides that the Central Government may by
notification, direct that these provisions will not apply in relation to any class or description of
companies or may apply subject to such exceptions, modifications or conditions as may be
specified in the notification.
Under section 174 (4) of the Companies Act, 2013 Where a meeting of the Board could not be
held for want of quorum, then, unless the articles of the company otherwise provide, the
meeting shall automatically stand adjourned to the same day at the same time and place in
the next week or if that day is a national holiday, till the next succeeding day, which is not a
national holiday, at the same time and place.
From the above provisons in case a meeting is adjourned, the violation under section 173(1)
does not arise as the meeting was started well in time but could not close due to want of
quorum. The holding of the adjourned meeting though in the next year will be treated as
continuaton of the 4th meeting of the previous year and will therefore not count in the meetings
held in the next year but in the previous year.
Therefore, the provisions of the Companies Act, 2013 have not been violated or contravened.
Question 2
(i)

What is the procedure to be followed, when a board meeting is adjourned for want of
quorum?

(ii)

How is a resolution by circulation passed by the Board or its Committee.

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Answer
(i)

Section 174(4) of the Companies Act, 2013 provides that, if a Board meeting could not be
held for want of quorum, then, unless the articles otherwise provide, the meeting shall
automatically stand adjourned to the same day in the next week, at the same time and
place, or if that day is a national holiday, till the next succeeding day which is not a
national holiday, at the same time and place.
It may be noted that on adjournment of a meeting, the meeting having started and not
ended will not constitiute a contravention of section 173(1) under which a company is
required to hold four board meetings in a year and not more than 120 days shall elapse
between two board meetings. In case of adjournment of the meeting, it shall be deemed
to have been held on the date on which it was started and not on the date when the
adjourned meeting was held.

(ii) 1.

The Companies Act, 2013 permits a decision of the Board of Directors to be taken
by means of a resolution by circulation. Board approvals can be taken in one of the
two ways, one by a resolution passed at a Board Meeting and the other, by means
of a resolution passed by circulation.
In terms of section 175(1) of the Companeis Act, 2013 no resolution shall be
deemed to have been duly passed by the Board or by a committee thereof by
circulation, unless the following have been complied with:
(a) the resolution has been circulated in draft, together with the necessary
papers, if any,
(b) the draft resolution has been circulated to all the directors, or members
of the committee, as the case may be;
(c) the Draft resolution has been sent at their addresses registered with the
company in India;
(d) such delivery has been made by hand or by post or by courier, or
through prescribed electronic means;
The Companies (Meetings of Board and its Powers) Rules, 2014
provides that a resolution in draft form may be circulated to the directors
together with the necessary papers for seeking their approval, by
electronic means which may include E-mail or fax.
(e) such resolution has been approved by a majority of the directors or
members, who are entitled to vote on the resolution;

2.

However, if at least 1/3rd of third of the total number of directors of the company for
the time being require that any resolution under circulation must be decided at a
meeting, the chairperson shall put the resolution to be decided at a meeting of the
Board (instead of being decided by circulation).

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Meetings of Board and its Powers


3.

5.3

A resolution that has been passed by circulation shall have to be necessarily be


noted in the next meeting of board or the committee, as the case may be, and made
part of the minutes of such meeting.

Question 3
PQR Limited held three board meetings till 31st October, 2014 during the financial year 2014.
The next board meeting was due to be held on 27th December, 2014 but for want of quorum
the meeting could not be held. A group of shareholders complained that the Company has
violated the provisions of section 173 of the Companies Act, 2013 in not holding the required
number of board meetings. Further, Mr. P and Mr. Q who are the directors of the Company
informed the Company their inability to attend the meeting because the notice of the meeting
was not served on them. Discuss whether there is any default on the part of the Company and
the consequences thereof. What will be the quorum in the given situation?
Answer
In terms of section 173(1) of the Companies Act, 2013, a company must hold a minimum
number of four meetings of its Board of directors in such a manner that not more than 120
days shall intervene between two consecutive meetings of the Board.
Further, the proviso to this subsection provides that the Central Government may by
notification, direct that these provisions will not apply in relation to any class or description of
companies or may apply subject to such exceptions, modifications or conditions as may be
specified in the notification
Further, as per section 174(4) of the Act, if a meeting of the Board could not be held for want
of quorum, then, unless the articles otherwise provide, the meeting shall automatically stand
adjourned till the same day in the next week, at the same time and place, or if that day is a
national holiday, till the next succeeding day which is not a national holiday, at the same time
and place.
It may be noted that on adjournment of a meeting, the meeting having started and not ended
will not constitiute a contravention of section 173(1) under which a company is required to hold
four board meetings in a year and not more than one hundred and twenty days shall elapse
between two board meetings. In case of adjournment of the meeting, it shall be deemed to
have been held on the date on whch it was started and not on the date when the adjourned
meeting was held.
Therefore, the provisions of section 173 shall not be deemed to have been contravened
merely by reason of the fact that a meeting of the Board which had been called in compliance
with the terms of that Section could not be held for want of a quorum.
As the meeting could not be held for want of quorum, it cannot be said that PQR Ltd has
violated the provisions of section 173 of the Act.
Under section 173(3) of the Companies Act, 2013 a meeting of the Board shall be called by
giving not less than seven days notice in writing to every director at his address registered

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with the company and such notice shall be sent by hand delivery or by post or by electronic
means.
Section 173(4) further provides that every officer of the company whose duty is to give notice
under this section and who fails to do so shall be liable to a penalty of Rs. 25,000.
In the given case as no notice, was served on Mr. P and Mr. Q who are the directors of the
company, thus, under section 173(4) every officer of the company responsible for the default
shall be punishable with fine of Rs. 25,000.
Neither the Companies Act, 2013 nor the Companies (Meetings of the Board and its Powers)
Rules, 2014 lay down any specific provision reagarding the validity of a resolution passed by
the Board of Directors in case notice was not served to all the directors as stipulated in the
Act. We shall have to go by the provisons of the Act which clearly provide for the notice to be
sent to every director failing which the resolutions passed will be invalid. The Supreme Court,
in case of Parmeshwari Prasad vs. Union of India.(1974) has held that the resolutions passed
in the board meeting shall not be valid, since notice to all the Directors was not given in
writing. Notice must be given to each director in writing. Hence, even though the directors
concerned knew about the meeting, the meeting shall not be valid and resolutions passed at
the meeting also shall not be valid.
Quorum for the meeting: Under section 174(1) the quorum for a meeting of the Board of
Directors of a company shall be one- third of its total strength or two directors, whichever is
higher, and the participation of the directors by video conferencing or by other audio visual
means shall also be counted for the purposes of quorum under this sub-section.
Section 174(3) further provides that where at any time the number of interested directors
exceeds or is equal to two- thirds of the total strength of the Board of Directors, the number of
directors who are not interested directors and present at the meeting, being not less than two,
shall be the quorum during such time.
Question 4
A director goes abroad for a period of more than 3 months and an alternate director has been
appointed in his place under section 161(2). During the period of absence of the original
director, a board meeting was called. In this connection, with reference to the provisions of the
Companies Act, 2013, advise whom should the notice of Board meeting be given to the
original director or to the alternate director?
Answer
According to Section 161(2) of the Companies Act, 2013, The Board of Directors of a company
may, if so authorised by its articles or by a resolution passed by the company in general
meeting, appoint a person, not being a person holding any alternate directorship for any other
director in the company, to act as an alternate director for a director during his absence for a
period of not less than three months from India.

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According to section 173(3), a meeting of the Board may be called by giving atleast a 7 days
notice in writing to every director to his registered address with the company and such notice
shall be sent by hand delivery or by post or by electronic means.
There is no legal precedence whether the notice of the meeting is to be sent to the original
director or the alternate director. But as matter of prudence the notice of the meeting may be
served to both the alternate director as well as the original director who is for the time being
outside India.
Question 5
The Board of Directors of M/s Infotech Consultants Limited, registered in Calcutta, proposes to
hold the next board meeting in the month of May, 2014.They seek, your advice in respect of
the following matters:
(i)

Can the board meeting be held in Chennai, when all the directors of the company reside
at Calcutta?

(ii)

Is it necessary that the notice of the board meeting should specify the nature of business
to be transacted?

Advise with reference to the relevant provisions of the Companies Act, 2013
Answer
(i)

There is no provison in the Companies Act, 2013 under which the board meetings must
be held at any particular place. The Companies Act lays down the provisions for holding
meetings by video conferencing, sending notices, procedures at the meeting etc.
Therefore, there is no difficulty in holding the board meeting at Chennai even if all the
directors of the company reside at Calcutta and the registered office is situated at
Calcutta provided that the requirements regarding the holding of a valid board meeting
and the other proivisions relating to the signing of register of contracts, taking roll calls,
etc. are complied with.

(ii) Section 173 (3) of the Companies Act, 2013 provides for the giving of notice of every
board meeting of not less than seven days to every director of the company. There is no
provision in the Act laying down the contents of the notice. Hence, it may be construed
that notice may be interpreted as intimation of the meeting and does not necessarily
include the sending of the Agenda of the meeting. However, considering the importance
of Board Meetings and the responsibilities placed on the directors for decisions taken at
the meetings, it is inevitable for them to be properly prepared and informed about the
items to be discussed at the Board Meetings. As a matter of good secretarial practice,
the notice should include full details and particulars of the business to be transacted at
the Board Meetings.
The articles of association of the company may make it mandatory to do so in almost all
cases.

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Question 6
XYZ Ltd. is a foreign collaborator in ABC Ltd incorporated in India under the Companies Act,
2013. The foreign collaborator holds 49% of the shareholding. The Board meetings of ABC Ltd
are usually held in India and sometimes meetings of the Board are called at a very short
notice for which there is a provision in the Articles of Association that during such situations
notices of the meetings of the Board can be sent by e-mail. State in this connection whether
such a provision in the Articles of Association of a foreign collaborated company is valid within
the purview of the provisions of the Companies Act, 2013.
Answer
In terms of the proviso to section 173(3) of the Companies Act, 2013 a meeting of the Board
may be called at shorter notice to transact urgent business subject to the condition that at
least one independent director, if any, shall be present at the meeting. No exception is made
for any class or classes of companies.
Further, under section 173(3) a meeting of the Board shall be called by giving not less than
seven days notice in writing to every director at his address registered with the company and
such notice shall be sent by hand delivery or by post or by electronic means. If we examine
the above provision, it is clear that the notice shall be sent by hand delivery or by post or by
electronic means.
Hence, the sending of notice by e mail is an ordinary mode of sending notice of a board
meeting under the Companies Act, 2013.
Therefore, in the given case the shorter notice is legally permitted with the only condition
being the presence of the quorum and at least one independent director. The provision of the
Articles in this regard is not relevant as the positon is amply claried in the Act itself.
Question 7
State the legal requirements to be complied with by a public company in respect of a Board
Meeting.
Examine with reference to the provisions of the Companies Act, 2013 whether notice of a
Board Meeting is required to be sent to the following persons:
(i)

An interested Director;

(ii)

A Director who has expressed his inability to attend a particular Board Meeting;

(iii) A Director who has gone abroad (for less than 3 months).
Answer
Legal requirements to be complied with by a public company in respect of a Board
Meeting:
(a) Frequency of meeting: According to Section 173(1) of the Companies Act, 2013, every
company shall hold its first Board meeting within 30 days of the date of incorporation.

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Further, for subsequent meetings, at least four board meetings will be held in a year in
such a manner that not more than one hundred and twenty days shall elapse between
two board meetings.
(b) Notice of meeting: Under section 173(3) a meeting of the Board shall be called by giving
not less than 7 days notice in writing to every director at his address registered with the
company and such notice shall be sent by hand delivery or by post or by electronic
means.
The proviso to section 173 (3) further provides that a meeting of the Board may be called
at shorter notice to transact urgent business subject to the condition that at least
one independent director, if any, shall be present at the meeting.
(c) Quorum for meetings: According to Section 174(1) of the Act, the quorum for a meeting
of the Board of directors of a company shall be one-third of its total strength (any fraction
contained in that one-third being rounded off as one), or two directors, whichever is
higher. The directors participating by video conferencing or any other audio visual means
shall be counted for the purposes of determining the quorum
(d) Adjourned meeting: According to Section 174(4) of the Act, if a meeting of the Board
could not be held for want of quorum, then, unless the articles otherwise provide, the
meeting shall automatically stand adjourned till the same day in the next week, at the
same time and place, or it that day is a national holiday, till the next succeeding day
which is not a national holiday, at the same time and place.
Notice of Board meeting
(i)

Section 173(3) of the Companies Act, 2013 makes it mandatory for every director to
be given proper notice of every boared meeting. It is immaterial whether a director
is interested or not.
An Interested Director: Notice must be given to a director even though he is
precluded from voting at the meeting on the business to be transacted

(ii) A Director who has expressed his inability to attend a particular Board Meeting: In
terms of section 173(3) even if a director states that he will not be able to attend the
next Board meeting; notice must be given to that director
(iii) A director who has gone abroad: A director who has gone abroad is still a director.
Therefore, he is entitled to receive notice of board meetings during his stay abroad.
The Companies Act, 2013, allows delivery of notice of meeting by electronic means
also. This is important because the Companies Act, 2013 permits a director to
participate in a meeting by video conferencing or any other audio visual means.
Question 8
ABC Ltd. has 12 directors on its Board and has the following clause in its Articles of
Association:

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The questions arising at any meeting of the Board of directors or any Committee thereof shall
be decided by a majority of votes, except in cases where the Companies Act, 2013 expressly
provides otherwise.
In one of the meetings of the Board of directors of ABC Ltd., 8 directors were present. After
completion of discussion on a matter, voting was done. 3 directors voted in favour of the
motion, 2 directors voted against the motion while 3 directors abstained from voting.
You are required to state with reference to the provisions of the Companies Act, 2013 whether
the motion was carried or not. It is clarified that the motion being voted upon was not
concerning a matter which requires consent of all the directors present in the meeting.
Answer
Regulation 68 of Table F of Schedule 1 to the Companies Act, 2013 provides that save as
otherwise expressly provided in the Companies Act, 2013, questions arising at any meeting of
the Board shall be decided by a majority of votes.
In the problem given in the question, the similar article exists in the Articles of Association of
ABC Ltd. In the given case, only 8 directors out of a total strength of 12 directors are present
and out of those 8 directors present only 5 directors have exercised their votes. In such a
case, only those directors who are present and vote on a motion are considered for
determining whether the motion is carried or not. That means out of the 5 directors who voted
on the motion are to be considered. Directors who did not vote will not be counted as either
having voted in favour or against. Their votes will be disregarded Accordingly, since number of
directors who voted in favour of the motion being 3, is higher than the number of directors who
voted against the motion being 2, the motion is carried or is considered to be passed by
majority.
Question 9
Analyse and Advise with reference to the provisions of the Companies Act, 2013, the following
situations.
(a) There are 9 directors in a company and out of which 2 offices of the directors have fallen
vacant. What will be the quorum for the Board Meeting?
(b) There are 15 directors in a company and during discussion of a particular item, 13 of the
directors are said to be interested within the meaning of section 184(2) of the
Companies Act, 2013. What shall be quorum of the meeting?
Answer
(a) Quorum is one third of the total strength of Board (any fraction contained in the said one
third being rounded of as one) or two directors whichever is higher. The total strengthis
to be derived after deducting the number of directors whose offices are vacant.
Therefore, where total number of directors is 9 and 2 offices of the directors have fallen
vacant, we find: 1/3 of (9-2) = 1/3 of 7 = 2 1/3 directors which will be rounded off as 3.

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Being higher than 2, therefore 3 directors would constitute the quorum for the Board
meetings.
(b) Under section 174(3) of the Companies Act, 2013 if at any time the number of the
remaining directors exceeds or is equal to two thirds of the total strength of the Board of
Directors, the number of the remaining directors who are non-interested but present at
the meeting, not being less than two shall constitute the quorum. Accordingly in the given
problem, there are in all 15 directors and the Board meeting commences with all the 15
directors. During the meeting, an item comes up for discussion in respect of which 13
happen to be interested directors. In this case, in spite of the excess of the interested
directors being more than two-thirds, the prescribed minimum number of non-interested
directors constituting the quorum, namely, 2 are present at the meeting and can transact
the particular item of business.
Question 10
Some urgent items are left over in the agenda of Board meeting which concluded and decision
cannot be deferred till its next meeting. Advice the company about how the resolution shall be
passed now.
Answer
Resolutions may be passed in resect of Board approvals in one of the two ways, either at the
board meetings or by circulation. The items which could not be concluded and decided at the
board meeting, if cannot be deferred till the next meeting may be passed by circulation,
provided they do not include such items as are required to be passed only at the meeting of
the directors under section 179(3) of the Companies Act, 2013.
In order to pass any resolution of the Board by circulation the fillowing steps must be taken
and completed as laid dwon in section 175(1):
(a) The draft of the proposed resolution must be circulated along with all relevant and
necessary papers;
(b) The above documents must be delivered to all the directors, members or the committee,
as the case may be, at their addresses registered with the company in India;
(c) The documents must be delivered by hand delivery or by post or by courier, or through
such electronic means as may be prescribed;
(d) The resolution must be approved by a majority of the directors or members, who are
entitled to vote on the resolution.
(e) There must not be any objection from not less than one-third of the total number of
directors of the company for the time being, requiring that such resolution under
circulation must be decided at a meeting.
Further, the resolution so passed shall be noted at a subsequent meeting of the Board or the
committee thereof, and be made part of minutes of such meeting

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Question 11
A meeting of the Board of No Holiday Ltd was held on a national holiday. However due to
lack of quorum, the proceedings of the meeting could not be held and therefore the Chairman
of the meeting decided with the consent of the majority that the Board meeting be adjourned to
next Monday. However, the date fixed for the adjourned meeting happened to be a national
holiday. Advise and draw your analogy with reference to the provisions of the Companies Act,
2013, whether the adjourned meeting of the Board can be held on a day which is a public
holiday.
Answer
The Companies Act 2013 vide section 173(3) merely states that a meeting of the Board shall
be called by giving not less than seven days notice in writing to every director at his address
registered with the company and such notice shall be sent by hand delivery or by post or by
electronic means. It further provides for the board meeting to be held on shorter notice to
transact urgent business subject to the condition that at least one independent
director, if any, shall be present at the meeting.
Therefore, as far as the holding of a board meeting is concerned, it may be held at any place
on any day including a national holiday if agreed by the directors.
However, when a board meeting is adjourned due to lack of quorum, then under section
174(4) the adjourned meeting can be held on the same day at the same time and place in the
next week or if that day is a national holiday, till the next succeeding day, which is not a
national holiday, at the same time and place, unless the Articles provide otherwise.
Therefore, the adjourned meeting cannot be held on a national holiday.unless the Articles of
the company provide that it can. The meeting will have to be held on the next working day to
the national holiday.
Question 12
Examine, with reference to the relevant provisions of the Companies Act, 2013, the
validity/legality of the following:
A meeting of the Board of directors of OPQ Co. Ltd. due to be held on 30.9.2014 did not take
place for want of quorum. As a result, the Company did not hold any Board meeting for the
quarter ended 30.9.2014 and there is a complaint that the Company has violated the
provisions of the Act in this regard.
Answer
Section 173(1) of the Companies Act, 2013 requires a company to hold at least 4 board
meetings in a year in such a manner that not more than 120 days shall elapse between two
board meetings.

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Moreover, under section 174 (4) in case a meeting is held but could not be continued due to
want of quorum, the meeting gets adjourned to the same time and place next week and if such
date is a national holiday to the next working day.
From the above therefore, there is no violation as the meeting was held on 30th Sept 2014 and
the meeting will automatically be adjourned to the same day at the same time and place in the
next week or if that day is a national holiday, till the next succeeding day, which is not a
national holiday, at the same time and place.
Moreover, it is not necessary under the Companies Act, 2013 for a company to hold board
meetings on quarterly basis as long as 4 meetings are held in a year.
So considering the dates when other meetings were held, it may emerge that the company
has not violated the provisons of the Companeis Act, 2013
Thus, the allegation that the company has contravened the provisions of section 173(1) in the
matter of holding the Board meeting is not correct.
Question 13
In the course of administration of the affairs of a limited company, Chairman of the Board of
directors came across a matter which required the approval by way of a board resolution. In
the prevailing circumstances, it is not possible to convene and hold a Board meeting. The
chairman approaches you to advise him of the way and the relevant procedure to obtain such
approval without holding the Board meeting. Advise the chairman, taking into account the
relevant provisions of the Companies Act, 2013
Answer
Passing of Resolution by Circulation:
Resolutions may be passed in resect of Board approvals in one of the two ways, either at the
board meetings or by circulation. Only those board resolutions may be passed by circulation,
that do not relate to such items as are required to be passed only at the meeting of the
directors under section 179(3) of the Companies Act, 2013.
In order to pass any resolution of the Board by circulation the fillowing steps must be taken
and completed as laid dwon in section 175(1):
(a) The draft of the proposed resolution must be circulated along with all relevant and
necessary papers;
(b) The above documents must be delivered to all the directors, members or the committee,
as the case may be, at their addresses registered with the company in India;
(c) The documents must be delivered by hand delivery or by post or by courier, or through
such electronic means as may be prescribed;
(d) The resolution must be approved by a majority of the directors or members, who are
entitled to vote on the resolution.

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(e) There must not be any objection from not less than one-third of the total number of
directors of the company for the time being, requiring that such resolution under
circulation must be decided at a meeting.
Further in terms of section 175(2) of the Companies Act, 2013 a resolution passed by
circulation under section 175(1) shall be noted at a subsequent meeting of the Board or the
committee thereof, as the case may be, and made part of the minutes of such meeting.
Question 14
State whether the acts done by the Board meeting be invalid if it was found afterwards that
there was some defect in the appointment of directors or any person acting as a director?
Answer
Under section 176 of the Companies Act, 2013 no act done by a person as a director shall be
deemed to be invalid, notwithstanding that it was subsequently noticed that his appointment
was invalid by reason of any defect or disqualification or had terminated by virtue of any
provision contained in this Act or in the articles of the company.
Provided that nothing in this section shall be deemed to give validity to any act done by the
director after his appointment has been noticed by the company to be invalid or to have
terminated.
Therefore, from the above provisions of law, all acts done by the Board meeting or by its
committee meeting or by any person acting as a director shall be as valid as if every such
director or such person had been duly appointed and was qualified to be a director. The
validity of all such acts done is not affected even if it discovered later on that there was some
defect in the appointment of any one or more of such directors or of any person acting as a
director.
However, once the defect in appointment is noticed by the company, no such acts of the
director will be valid.
Question 15
Mr. MTP was appointed as a director at the Annual General Meeting of a limited company held
on 30th September, 2013 and he carried on his duties and functions as a director. In the
month of August, 2014, it was found out that there were certain irregularities in his
appointment and on 31st August, 2014, his appointment was declared invalid. But Mr. MTP
continued to act as director even after 31st August, 2014 You are required to state, with
reference to the provisions of the Companies Act, 2013, whether the acts done by Mr. MTP
are valid and binding upon the company ?
Answer
In accordance with section 176 of the Companies Act, 2013 acts done by a person as a
director shall be deemed to be valid, notwithstanding that it may afterwards be discovered that

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his appointment was invalid by reason of any defect or disqualification or had terminated by
virtue of any provision contained in this Act or in the articles of the company.
The Proviso to section 176 further provide that nothing in this section shall be deemed to give
validity to acts done by a director after his appointment has been noticed by the company to
be invalid or to have terminated.
In view of the above provisions of section 176 of the Companies Act, 2013, the acts done by
Mr. MTP up to the date of the irregularity in his appointment coming to the notice of the
company will be deemed as valid and binding on the Company.
Any act done by him after the date on which the irregularity or defect in his appointment was
noticed by the company will be deemed invalid. The acts done by Mr. MTP after 31st August,
2014 shall be deemed to be invalid and not binding upon the Company
Question 16
Accurate Arcs Ltd. maintains the Minutes Book of the Board Meetings in loose-leaf system and
get them bound once in three months. Can it do so? Board meetings were held on 2nd April,
2014 and 28th April, 2014. Mr. Rameshwar, who was the Chairman of these two Board
Meetings died on 1.5.2014, without signing the Minutes. How should be the Minutes be signed
and by whom?
Answer
In terms of section 118(1) of the Companies Act, 2013 every company shall cause
minutes of the proceedings of every meeting of its Board of Directors or of every
committee of the Board, to be prepared and signed in such manner as may be prescribed and
kept within thirty days of the conclusion of every such meeting in books kept for that purpose
with their pages consecutively numbered.
Acording to the Companies (Management and Administration) Rules, 2014:
(i)

The minutes of proceedings of each meeting shall be entered in the books maintained for
that purpose along with the date of such entry within 30 days of the conclusion of the
meeting.

(ii)

Each page of every such book shall be initialled or signed and the last page of the record
of proceedings of each meeting or each report in such books shall be dated and signed
by the chairman of the said meeting or the chairman of the succeeding meeting.

Thus, from the clear provisions of the above referred section the Minutes must be kept in
books form for that purposes with consecutively numbered pages. Therefore, Minutes cannot
be kept in loose leaf system.
In case the chairman passes away before signing the Minutes, the chairman of the succeeding
Board meeting shall sign the Minutes.

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Corporate and Allied Laws

Question 17
M/s ABC Ltd. had power under its memorandum to sell its undertaking to another company
having similar objects. The Articles of the company contained a provision by which directors
were empowered to sell or otherwise deal with the property of the company. The Shareholders
passed an ordinary resolution for the sale of its assets on certain terms and required the
directors to carry out the sale. The Directors refused to comply with the wishes of the
shareholders where upon it was contended on behalf on the shareholders that they were the
principal and directors being their agents were bound to give effect to their decision. Based
on the above facts, decide the following issues, having regard to the provisions of the
Companies Act, 2013 and case laws.
(i)

Whether the contention of shareholders against the non-compliance of their wishes by


the directors is tenable.

(ii)

Can shareholders usurp the powers which by the articles are vested in the directors by
passing a resolution in the general meeting?

Answer
According to section 179(1), the Board of Directors of a company shall be entitled to exercise
all such powers, and to do all such acts and things, as the company is authorised to exercise
and do:
Provided that in exercising such power or doing such act or thing, the Board shall be subject
to the provisions contained in that behalf in this Act, or in the memorandum or articles, or in
any regulations not inconsistent therewith and duly made thereunder, including regulations
made by the company in general meeting:
Provided further that the Board shall not exercise any power or do any act or thing which is
directed or required, whether under this Act or by the memorandum or articles of the company
or otherwise, to be exercised or done by the company in general meeting.
The Companies Act, 2013 vide section 180 (1) lays down the powers of the Board of Directors
of a company which can be exercised only with the consent of the company by a special
resolution. Clause (a) of section 180(1) defines one such power as the power to sell, lease or
otherwise dispose of the whole or substantially the whole of the undertaking of the company or
where the company owns more than one undertaking, of the whole or substantially the whole
of any of such undertakings.
Therefore, the sale of the undertaking of a company can be made by the Board of Directors
only with the consent of the members of the company accorded vide a special resolution.
Even if the power is given to the Board by the memorandum and articles of the company, the
sale of the undertaking must be approved by the shareholders by a special resolution.
Therefore, the correct procedure to be followed is for the Board to approve the sale of the
undertaking clearly specifying the terms of such sale and then convene a general meeting of
the members to have the proposal approved by a special resolution.

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Meetings of Board and its Powers

5.15

In the given case therefore, the procedure followed is completely incorrect. The shareholders
cannot on their own make out a proposal of sale and pass an ordinary resolution to implement
it through the directoros.
Therefore, the contention of the shareholders is incorrect in the first place as it is not within
their authority to approve a proposal independently of the Board of Directors. It is for the
Board to approve a proposal of sale of the undertaking and then get the members to approve
it by a special resolution.
Further, in exercising their powers the directors do not act as agent for the majority members
or even all the members. The members therefore cannot by resolution passed by a majority or
even unanimously supersede the powers of directors or instruct them how they shall exercise
their powers.
Question 18
Out of the powers exercisable by the Board under section 179, the board wants to delegate to
the Managing Director of the company the power to borrow monies otherwise than on
debentures. Advise whether such a delegation is possible? Would your answer be different, if
the delegation is given to the manager or any other principal officer including a branch officer
of the company?
Answer
Under section 179(3) of the Companies Act, 2013 the Board of Directors of a company shall
exercise the following powers on behalf of the company by means of resolutions passed at
meetings of the Board:
a.

To make calls on shareholders in respect of money unpaid on their shares;

b.

To authorise buy-back of securities under section 68;

c.

To issue securities, including debentures, whether in or outside India;

d.

To borrow monies

e.

To invest the funds of the company

f.

To grant loans or give guarantee or provide security in respect of loans;

g.

To approve financial statement and the Boards report;

h.

To diversify the business of the company;

i.

To approve amalgamation, merger or reconstruction;

j.

To take over a company or acquire a controlling or substantial stake in another company;

k.

Any other matter which may be prescribed:

Provided that the Board may, by a resolution passed at a meeting, delegate to any committee
of directors, the managing director, the manager or any other principal officer of the company

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Corporate and Allied Laws

or in the case of a branch office of the company, the principal officer of the branch office, the
powers specified in clauses (d) to (f) on such conditions as it may specify:
From the above provisons it is clear that the power to borrow monies under (d) above, may be
delegated to the Managing Director or to the manager or any other principal officer of the
company. However, the power to borrow monies on behalf of the company cannot be
delegated to a branch officer (prcincipal officer of the branch) unless the borrowing is related
to the requirements of the functioning of the branch office.
Question 19
A Managing Director was authorized by the Board to borrow money on a Promissory Note.
State in this connection whether borrowing on a promissory note is within the powers of the
directors.
Answer
In terms of section 179(3)(d) the board of directors is required to exercise the power of
borrowoing monies only by means of a resolution passed at a duly convened Board Meeting.
The proviso to section 179 further iterates that the Board may by means of a resolution
passed at a Board Meetiing delegate this power to the Managing Director. The section does
not describe the modus operandi of the borrowing transaction.
From the above provisions, it is clear that the Board may delegate the power to borrow against
promissory note.
It should be noted however, that the requirement of approval of the company, if applicable will
have to be met and such approval taken. Delegation to the Managing Director merely covers
the part of Board approval and all further approval as required by Companeis Act will have to
be taken.
It has been held in [P. Rangaswami Reddiar and Another vs. R. Krishnaswami Reddiar and
another (1971) 43 Comp. Case 232] that where such a borrowing permissible under the
companys articles and moneys were borrowed on promissory notes, such transaction would
come within the powers of the directors, It has also been held in the same case that where a
person was appointed as the managing director of the company by the Boards resolution
vested with full powers of the management of the affairs of the company and authorised to
sign all the papers of the company, he would have full powers to borrow money on a
promissory note even without a resolution of the Board as contemplated by Section 292(c) of
the Companies Act, 1956. This same ruling can be applied for section 179(3)(d) of the
Companies Act, 2013 also.
Question 20
Advise the Board of Director of Spectra Papers Ltd. regarding validity and extent of their
powers, under the provisions of the Companies Act, 2013 in relation to the following matters:
(i)

Buy-back of the shares of the Company, for the first time, upto 10% of the paid up equity
share capital without passing a special resolution.

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Meetings of Board and its Powers


(ii)

5.17

Delegation of Power to the Managing Director of the company to invest surplus funds of
the company in the shares of some companies.

Answer
(i)

According to clause (b) of section 179(3), The Board of Directors of a company shall
exercise the power to authorise buy-back of securities under section 68, on behalf of the
company by means of resolutions passed at meetings of the Board.
According to section 68(2), No company shall purchase its own shares or other specified
securities, unless
(a) the buy-back is authorised by its articles;
(b) a special resolution has been passed at a general meeting of the company
authorising the buy-back:
However, nothing contained in this clause shall apply to a case where
(1) the buy-back is, 10% or less of the total paid-up equity capital and free reserves of
the company; and
(2) such buy-back has been authorised by the Board by means of a resolution passed
at its meeting,
Thus, we can say that in the case of buy-back of shares of the Companny, for the first
time, upto 10% of the paid up share capital, a special resolution will not be required if
such buy-back has been authorised by the Board by means of a resolution passed at its
meeting.

(ii) According to clause (e) of section 179(3), The Board of Directors of a company shall
exercise the power to invest the funds of the company, on behalf of the company by
means of resolutions passed at meetings of the Board
The The board may under the proviso to section 179(3) of the Companies Act, 2013
delegate the power to invest the funds of the company by a Board Resolution passed at
a duly convened Board Meeting. However, the investment in shares of other companies
will be governed by the applicable provisions of the Companeis Act, 2013 (i.e. section
186 of the Companies Act, 2013). Since the investment of funds is governed by section
of the Companies Act, 2013, thus, specific provisions of section 186 will be applicable for
such investment. According to section 186(5), No investment shall be made or loan or
guarantee or security given by the company unless the resolution sanctioning it is passed
at a meeting of the Board with the consent of all the directors present at the meeting and
the prior approval of the public financial institution concerned where any term loan is
subsisting, is obtained. Thus, a unanimous resolution of the Board is required. Section
186 does not provide for delegation. Hence, the proposed delegation of power to the
Managing Director to invest surplus funds of the company in the shares of some other
companies, is not in order.

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Corporate and Allied Laws

Question 21
An Audit Committee of a Public Limited Company constituted under section 177 of the
Companies Act, 2013 submitted its report of its recommendation to the Board. The Board,
however, did not accept the recommendations. In the light of the situation, analyze whether:
(a) The Board is empowered not to accept the recommendations of the Audit Committee.
(b) If so, what alternative course of action, would be Board resort to?
Answer
(a) As per Section 177(2) and (3) of the Companies Act, 2013 an audit committee must be
formed within a year of the commencement of the Act or within a year of the incorporaton
of a company as the case may be, and will consist of at least 3 directors out of which the
independent directors shall constitute the majority.
Under section 177(8) the Boards Report which is laid before a general meeting of the
company under secton 134 (3) where the financial statements of the company are placed
before the members, must disclose the composition of the audit committee and also
where the Board has not accepted any recommendations of the audit Committee the
same shall be disclosed alongwith the reasons therefor. Therfore, the Board is
empowered not to accept the recommendations of the Audit Committee but only under
genuine circumstances and with legitimate reasons.
(b) If the Board does not accept the recommendations of the Audit Committee, it shall
disclose the same in its report under section 134 (3) placed before a general meeting of
the company.
Question 22
MNC Ltd., a company, whose paid up capital was ` 4.00 Crores, has issued rights shares in
the ratio of 1:1. The said company is listed with Mumbai Stock Exchange. Whether the
company is required to appoint any Audit Committee and if yes, draft a suitable Board
Resolution to appoint an Audit committee covering the aspects as provided in the Companies
Act, 2013.
Answer
Under section 177(1) of the Companies Act, 2013 the Board of Directors of every listed
company and such other class or classes of companies, as may be prescribed, shall constitute
an Audit Committee. Therefore, MNC Ltd being a listed company will be bound to constitute an
audit committee under the Act.
Further under section 177(2) the Audit Committee shall consist of a minimum of three directors
with independent directors forming a majority.
Further, the majority of members of Audit Committee including its Chairperson shall be
persons with ability to read and understand the financial statement.
The draft Board Resolution for the constitution of an Audit Committee may be as follows:

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Meetings of Board and its Powers

5.19

Resolved that pursuant to the provision contained in section 177 of the companies Act 2013
and the applicable clause of Listing Agreement with the Mumbai Stock Exchange, an Audit
Committee of the Company be and is hereby constituted with effect from the conclusion of this
meeting, with members as under:
1.

Mr. A -- An Independent Director.

2.

Mr. B -- An Independent Director

3.

Mr. C -- Director nominated by IDBI

4.

Mr. D -- An Independent Director

5.

Mr. FD -- Financial Executive

6.

Mr. MD -- Managing Director

Further resolved that the Chairman of the Committee, who shall be an independent Director,
be elected by the committee members from amongst themselves.
Further resolved that the quorum for a meeting of the Audit Committee shall be the chairman
of the Audit Committee and 2 other members (other than the Managing Director),.
Further resolved that the terms of reference of the Audit Committee shall be in accordance
with the provisions of section 177(4) of the Companies Act, 2013
Further resolved that the Audit committee shall conduct discussions with the auditors
periodically about internal control system, the scope of audit including the observations of the
auditors.
Further resolved that the Audit Committee shall review the quarterly and annual financial
statements and submit the same to the Board with its recommendations, if any.
Further resolved that the recommendations made by the Audit Committee on any
relating to financial management including the audit report shall be binding on the
However, where such recommendations are not accepted by the Board, the reasons
same shall be recorded in the minutes of the Board meeting and communicated
shareholders.

matter
Board.
for the
to the

Further resolved that the Company Secretary of the Company shall be the Secretary to the
Audit Committee.
Further resolved that the Chairman of the Audit Committee shall attend the annual general
meeting of the Company to provide any clarifications on matters relating to audit as may be
required by the members of the company.
Further resolved that the Boards Report/Annual Report to the members of the Company shall
include the particulars of the constitution of the Audit Committee and the details of the non
acceptance of any recommendations of the Audit Committee with reasons therefor.

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Corporate and Allied Laws

Question 23
Supra Limited, a private company, has been converted into a public company and under the
provision of the of the Companies Act, 2013. The company proposes to constitute an audit
committee. Taking into account the provisions of the Companies Act, 2013 draft a board
resolution covering the following matters:
(i)

Member of the audit committee.

(ii)

Chairman of the audit committee.

(iii) Any two functions of the said committee.


Answer
AUDIT COMMITTEE BOARDS RESOLUTION:
Resolved that pursuant to Section 177 of the Companies Act, 2013 an Audit Committee
consisting of the following Directors be and is hereby constituted.
1.

Mr. ---- Nominee of IDBI

2.

Mr. ---- Independent Director

3.

Mr. ---- Independant Director

4.

Mr. --- Independent Director

5.

Mr. ----- Managing Director.

6.

Mr -------- Chief Financial Officer

Further resolved that the Chairman of the Audit Committee shall be elected by its members
from amongst themselves and shall be an independent director.
Further resolved that the quorum for a meeting of the Audit committee shall be three directors
(other than the Managing Director), out of which at least two must be independent directors.
Resolved further, that the Audit Committee shall perform all the functions as laid down in
section 177(4) of the Companies Act, 2013 including but not limited to:
a.

make the recommendation for appointment, remuneration and terms of appointment of


the auditors of the company;

b.

review and monitor the independence and performance of auditors of the compny and
the effectiveness of the audit process.

Further resolved that the Audit Committee shall review the quarterly and annual financial
statements and submit the same to the Board with its recommendations if any.
Question 24
Explain how the provisions of the Companies Act, 2013 relating to Audit Committee will help in
achieving some of the objectives of Corporate Governance.

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Meetings of Board and its Powers

5.21

Answer
Companies, particularly public listed companies raise huge amounts of monies from the
members of the public and public financial institutions. They owe it to all the vast number of
persons and institutions who have reposed their faith in them and have invested in them, that
their faith is rewarded both in terms of annual return and in terms of wealth appreciation in real
terms. In order to achieve this it is vital to have the highest quality of corporate governance in
the conduct of affairs of such companies. Thus, the role of audit committees have been
enhanced, their responsibilities made more objective and the accountability has increased
substantially.
In this context the provisions of the Companies Act, 2013 have been framed to improve
corporate governance standards and protect the interests of the public and the financial
institutions who have invested in companies. These provisions may be highlighted as under:
01. The constitution of Audit Committees under section 177(2) requires the majority
representation from independent directors. In other words, persons from within the
management cannot form a majority in the Committee, thereby making the functioning of
these committees more transparent;
02. The proviso to section 177(2) further requires the majority of members and the
chairperson of the Audit Committees to be persons who can understand financial
statements. This enables a meaningful exercise of the committees functions by
knowledgable persons thereby increasing the effectiveness of such committees.
03. Now the terms of reference or the minimum scope of work of an Audit Committee has
been laid down in the act itself under section 177(4). By doing this the vagueness and
doubt in the role and functions of such committees has been removed.
04. The Audit Committee shall have authority to investigate into any matter in relation to the
areas of its scope of functioning or referred to it by the Board and for this shall have
power to obtain professional advice from external sources and have full access to
information contained in the records of the company. This provides the Audit Committee
to function with a high degree of effectiveness by accessing external professional advice
and the records of the company.
05. The recommendations of the Audit Committee are binding on the Board to take
appropriate corrective actions. In case the Board of Director refuses to accept the
recommendations of the Audit Committee, it bound to disclose the same with the reasons
for non acceptance, in its report to the members of the company under section 134 (3)
which relates to the Directors Report on Financial Statements to the members of the
company.
It will be seen from the above provisions of the Companies Act, 2013 that efforts have been
made to make such committees more impartial, effective and accountable which will enable to
company to improve the quality of its corporate governance thereby improving accountability
and avoiding financial impropritey.

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5.22

Corporate and Allied Laws

Question 25
The Board of Directors of Stepping Stones Publications Ltd. at a meeting held on 15.1.2014
resolved to borrow a sum of ` 15 crores from a nationalized bank. Subsequently the said
amount was received by the company. One of the Directors, who opposed the said borrowing
as not in the interest of the company has raised an issue that the said borrowing is outside the
powers of the Board of Directors. The Company seeks your advice and the following data is
given for your information:
(i)

Share Capital ` 5 crores

(ii)

Reserves and Surplus ` 5 crores

(iii) Secured Loans ` 15 crores


(iv) Unsecured Loans ` 5 crores
Advice the management of the company.
Answer
According to the provisions of Section 180(1)(c) of the Companies Act, 2013, there are
restrictions on the borrowing powers to be exercised by the Board of directors. According to
the said section, the borrowings should not exceed the aggregate of the paid up capital and
free reserves. While calculating the limit, the temporary loans obtained by the company from
its bankers in the ordinary course of business will be excluded. However, from the figures
available in the present case the proposed borrowing of ` 15 crores will exceed the limit
mentioned. Thus, the borrowing will be beyond the powers of the Board of directors.
Thus, the management of Stepping Stone Publications Ltd., should take steps to convene the
general meeting and pass a special resolution by the members in the meeting as stated in
Section 180(1)(c) of the Companies Act, 2013. Then the borrowing will be valid and binding on
the company and its members.
Question 26
The last three years Balance Sheet of PTL Ltd., contains the following information and
figures:

Paid up capital
General Reserve
Credit Balance in
Profit & Loss Account
Debenture
Redemption
Reserve
Secured Loans

As at 31.03.2012
`
50,00,000
40,00,000
5,00,000

As at 31.03.2013
`
50,00,000
42,50,000
7,50,000

As at 31.03.2014
`
75,00,000
50,00,000
10,00,000

15,00,000

20,00,000

25,00,000

10,00,000

15,00,000

30,00,000

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Meetings of Board and its Powers

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On going through other records of the Company, the following is also determined:
Net Profit for the year (as calculated in accordance
with the provisions of the Companies Act, 2013)

12,50,000

19,00,000

34,50,000

In the ensuing Board Meeting scheduled to be held on 5th November, 2014, among other items
of agenda, following items are also appearing:
(i)

To decide about borrowing from Financial institutions on long-term basis.

(ii)

To decide about contributions to be made to Charitable funds.

Based on above information, you are required to find out as per the provisions of the
Companies Act, 2013, the amount upto which the Board can borrow from Financial institution
and the amount upto which the Board of Directors can contribute to Charitable funds during
the financial year 2014-15 without seeking the approval in general meeting.
Answer
(i)

Borrowing from Financial Institutions: As per Section 180(1)(c) of the Companies Act,
2013, the Board of Directors of a company, without obtaining the approval of
shareholders in a general meeting, can borrow money including moneys already
borrowed upto an amount which does not exceed the aggregate of paid up capital of the
company and its free reserves. Such borrowing shall not include temporary loans
obtained from the companys bankers in ordinary course of business. Here, free
reserves do not include the reserves set apart for specific purpose.
Since the decision to borrow is to be taken in a meeting to be held on 5th November,
2014, the figures relevant for this purpose are the figures as per the Balance Sheet as at
31.03.2014. According to the above provisions, the Board of Directors of PTL Ltd. can
borrow, without obtaining approval of the shareholders in a general meeting, upto an
amount calculated as follows:

`
Paid up Capital

7,500,000

General Reserve (being free reserve)

5,000,000

Credit Balance in Profit & Loss Account (to be treated as free


reserve)

1,000,000

Debenture Redemption Reserve (This reserve is not to be considered


since it is kept apart for specific purpose of debenture redemption)

----

Aggregate of paid up capital and free reserve

13,500,000

Total borrowing power of the Board of Directors of the company, i.e,


100% of the aggregate of paid up capital and free reserves

13,500,000

Less: Amount already borrowed as secured loans

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3,000,000

5.24

Corporate and Allied Laws


Amount upto which the Board of Directors can further borrow without
the approval of shareholders in a general meeting.

10,500,000

(ii) Contribution to Charitable Funds: As per Section 181 of the Companies Act, 2013, the
Board of Directors of a company without obtaining the approval of shareholders in a
general meeting, can make contributions to genuine charitable and other funds upto an
amount which, in a financial year, does not exceed five per cent of its average net profits
during the three financial years immediately preceding, the financial year.
According to the above provisions, the Board of Directors of the PTL Ltd. can make
contributions to charitable funds, without obtaining approval of the shareholders in a
general meeting, upto an amount calculated as follows:
Net Profit for the year (as calculated in accordance with the provisions of of the
Companies Act, 2013:

`
For the financial year ended 31.12.2011
For the financial year ended 31.12.2012
For the financial year ended 31.12.2013
TOTAL
Average of net profits during three preceding financial years
Five per cent thereof

12,50,000
19.00,000
34,50,000
66,00,000
22,00,000
1,10,000

Hence, the maximum amount that can be donated by the Board of Directors to a genuine
charitable fund by PTL Ltd during the financial year 2013 -14 will be Rs 1,10,000 without
seeking the approval of the shareholders in a general meeting.
Question 27
The Board of Directors of LM Limited propose to donate ` 50,000 to a political party during the
Financial year ending 31st March, 2014. The average net profits determined in accordance
with the provisions of the Companies Act, 2013 during the three immediately preceding three
financial years is ` 40,00,000. Examine with reference to the provisions of the Companies Act,
2013 whether the proposed donation is within the power of the Board of Directors of company.
Answer
Donation to political parties: Under section 182(1) of the Companies Act, 2013 a company
may contribute any amount directly or indirectly to any political party provided that the
aggregate of the amount which may be so contributed by the company in any financial year
shall not exceed 7.5% of its average net profits during the three immediately preceding
financial years. In the given case LM Ltd it is presumed to be a non government company. The
amount of political contribution it can make in a financial year shall not exceed 7.5% of the
average profits of the immediately preceeding three years. In the given case the eligible
amount comes to 7.5% of Rs 40 lakhs = Rs 3 Lakhs and the amount actually contributed being

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Meetings of Board and its Powers

5.25

` 50,000 is well within the power of the Board of Directors of the company. Hence, the Board
of Directors is empowered to make a donation by passing a resolution at a Board meeting.
The company is also required to make is proper disclosure in the profit and loss account.
Question 28
Company Y with a paid-up capital of Rs.50 lakhs entered into a contract with company Z in
which a director of Y is holding equity shares of the nominal value of Rs.50,000. The director
did not disclose his interest at the Board meeting under section 184 of the Companies Act,
2013. Is the director liable for his act?
Answer
As per section 184 (2) of the Companies Act, 2013 the disclosure of interest by directors do
not apply to any contract or arrangement within two companies where any of the directors of
one company or two or more of them together holds or hold not more than 2% of the paid up
share capital in the other company. In the present case, in case the holding of the director of
Y in company Z is less than 2% [(50,000/50,00,000)*100% = 1%], the director is not liable.
Question 29
The Articles of Association of a company states that a director shall not vote in respect of a
contract in which he is interested. In a resolution put up for approval of the shareholders, can
a director exercise his voting right in favour of a contract in which he is interested?
Answer
When a director exercises his voting right as a shareholder, he is free to vote in his own best
interests like any other shareholder.
A provision in the Articles of Association of a company stating that a director shall not vote in
respect of a contract in which he is interested does not preclude him from voting thereon as a
shareholder in the general meeting of the company. A shareholder may vote as he pleases
even when his interests are different from or opposed to those of the company. Shareholders
are not trustees for the company or for one another.
However, in Cooks vs. Deeks, it was held that if directors use their position as directors to
obtain for themselves the property of the company, as for example, by means of a beneficial
contract, they cannot, by using their voting power as shareholders in general meeting, prevent
the company from claiming the benefit of it.
Hence the director can exercise his voting right at a general meeting in favour of a contract in
which he is interested.
Question 30
Amar Textiles Ltd. is a company engaged in the manufacture of fabrics. The company has
investments in shares of other bodies corporate including 70% shares in Amar Cotton
Company Ltd. and it has also advanced loans to other bodies corporate. The aggregate of all
the investments made and loans granted by Amar Textiles Ltd. exceeds 60% of its paid up

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5.26

Corporate and Allied Laws

share capital and free reserves and also exceeds 100% of its free reserves. In course of its
business requirements, Amar Textiles Ltd. has obtained a term loan from Industrial
Development Bank of India which is still subsisting. Now the company wants to increase its
holding from 70% to 80% of the equity share capital in Amar Cotton Company Ltd. by
purchase of additional 10% shares from other existing shareholders. State the legal
requirements to be complied with by Amar Textiles Ltd. under the provisions of the Companies
Act, 2013 to give effect to the above proposal.
Answer
Amar Cotton Co. Ltd. is not a wholly-owned subsidiary of Amar Textiles Ltd.
1.

According to section 186(2) of the Companies Act, 2013, no company shall directly or
indirectly
(a) give any loan to any person or other body corporate;
(b) give any guarantee or provide security in connection with a loan to any other body
corporate or person; and
(c) acquire by way of subscription, purchase or otherwise, the securities of any other
body corporate,
exceeding 60% of its paid-up share capital, free reserves and securities premium
account or 100% of its free reserves and securities premium account, whichever is more.
As the aggregate of the investments in shares and loans granted to other bodies
corporate exceeds 60% of the paid-up share capital and free reserves and also 100% of
the free reserves, it exceeds the limit under section 186 (2) of the Companies Act, 2013.
It is therefore, necessary for Amar Textiles Ltd., to pass a special resolution of the
members at a duly convened General Meeting before increasing its holding from 70% to
80%.

2.

The notice of special resolution must be accompanied by an explanatory statement and


must include full particulars of the investment proposed to be made along with the
purpose of such investment in compliance with section 186 (4) of the Act.

3.

According to section 186(5) of the Companies Act, 2013, no investment shall be made or
loan or guarantee or security given by the company unless the resolution sanctioning it is
passed at a meeting of the Board with the consent of all the directors present at the
meeting and the prior approval of the public financial institution concerned where any
term loan is subsisting, is obtained:
However, prior approval of a public financial institution shall not be required where the
aggregate of the loans and investments so far made, the amount for which guarantee or
security so far provided to or in all other bodies corporate, along with the investments,
loans, guarantee or security proposed to be made or given does not exceed the limit as
specified in 186(2), and there is no default in repayment of loan instalments or payment

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Meetings of Board and its Powers

5.27

of interest thereon as per the terms and conditions of such loan to the public financial
institution.
In the present case, Amar Textiles Ltd., had obtained a term loan from Industrial
Development Bank of India (IDBI) which is not a public financial institution within the
meaning under Section 2 (72) of the Companies Act, 2013 and therefore the provisions
of Section 186 (5) are not attracted even if such loan is still subsisting. The company is
not required to obtain prior approval of IDBI for making any further investment.
4.

Further, as required by provisions of Section 186 (5), the investment proposal must be
passed at the Board meeting by a unanimous decision of all the directors present at the
meeting.

5.

The company must enter the prescribed particulars of investment in a register of


investment required to be maintained under section 186(9) of the Act

Question 31
The Board of directors of Very Well Ltd., are contributing every year to a charitable
organization a sum of ` 60, 000/-. In a particular year, the company suffered losses and the
directors are contemplating to contribute the said amount in spite of the losses. In this
connection, state whether the directors can do so?
Answer
Under section 181 of the Companies Act, 2013 the Board of Directors of a company is
authorized to contribute to bonafide charitable and other funds. However, in case the
aggregate amount of such contribution in any financial year exceeds five per cent. of its
average net profits for the three immediately preceding financial years, prior permission of the
company in general meeting shall be required.
The section does not make it mandatory for the company to have a profit for making a
charitable contribution in a financial year. As the amount of donation is restricted to the
average of previous 3 years profits, it is possible for a company suffering a loss to make a
contribuition provided it is to a bonafide charitable fund.
In the present case, even though the company has incurred a loss it can contribute to the
charitable fund only if it is a bonafied charitable fund and the amount is upto the average of
the preceeding three years profits. In case the contribution exceeds the limit, the approval of
the members must be taken at a general meeting of the company.
Question 32
M/s XYZ Ltd. was incorporated on 1st January, 2012. On 1st November, 2014 a political party
approaches the company for a contribution of Rupees Ten lakhs for political purpose. Advise
in respect of the following:
(i)

Is the company legally authorised to give this political contribution?

(ii)

Will it make any difference, if the company was in existence on 1st October, 2011?

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5.28
(iii)

Corporate and Allied Laws


Can the company be penalised for defiance of Rules of this regard?

Answer
(i)

In terms of section 182 (1) of the Companies Act, 2013 the company is legally not
authorized to make a political contribution unless it has been in existence for three
financial years or more. Since XYZ Co. has not completed three years of existence on
2nd November 2014, it is not eligible to give political contribution.

(ii) Yes, because in that case, XYZ limited shall complete three financial years of its
existence by 1.11.2014, therefore, will be eligible to give political contribution under
section 182 (1) of the Companies Act, 2013. However, the amount of contribution in the
aggregate in a financial year shall not exceed 7.5% of its average net profits during the
three immediately preceding financial years. Further, no such contribution shall be
made by a company unless a resolution authorising the making of such contribution is
passed at a meeting of the Board of Directors.
(iii) Under section 182 (4) of the Companies Act, 2013 if a company makes any contribution
in contravention of the provisions of section 182, the company shall be punishable with
fine which may extend to five times the amount so contributed and every officer of the
company who is in default shall be punishable with imprisonment for a term which may
extend to six months and with fine which may extend to five times the amount so
contributed.
Question 33
Win Ltd. is a company incorporated 15 years ago and during the last three consecutive
financial years it earned profits, of ` 5.00 lakhs, 8.00 lakhs and 11.00 lakhs. In order to
augment its business prospects, it wants to make donations to political parties. State with
reference to the provisions of the Companies Act, 2013 whether the company can make such
donations and if yes to what extent. Also state which type of donation, Subscription, payment,
expenditure is regarded as contribution for political purpose.
Answer
According to Section 182 (1) of the Companies Act, 1956, a company, except a Government
Company and a company which has been in existence for less than three financial years, can
make political contributions, directly or indirectly, not exceeding seven and a half per cent of
the average profits during the three immediately preceding financial years.
Further, the contribution shall be made by a company only after passing a resolution at a
meeting of the Board of Directors authorising such contributions.
Based on the provisions of the Companies Act, 2013, Win Ltd. is a company incorporated 15
years ago and during the last three consecutive financial years it has earned profits. Based on
the profits earned in the preceeding three financial years the amount of donation it can make
is as under:

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Meetings of Board and its Powers


Under section 182 (1)
Total Profit (three years)
Average Net Profit
Amount of donation to political party

5.29

`
24,00,000/8,00,000/60,000 (7.5% of 8,00,000)

Therefore, if Win Ltd. wants to make donation to political parties, it can contribute the amount
not exceeding ` 60,000.
Further, the type of donations that can be made or the payments or expenditures which will be
deemed to be political contributions are laid down in sections 182 (2) which states as under:
(a) a donation or subscription or payment caused to be given by a company on its behalf or
on its account to a person who, to its knowledge, is carrying on any activity which, at the
time at which such donation or subscription or payment was given or made, can
reasonably be regarded as likely to affect public support for a political party shall also be
deemed to be contribution of the amount of such donation, subscription or payment to
such person for a political purpose;
(b) The amount of expenditure incurred, directly or indirectly, by a company on an
advertisement in any publication, being a publication in the nature of a souvenir,
brochure, pamphlet or the like, is issued:
(i)

on behalf of a political party, then it shall be deemed to be a contribution to such


political party; and

(ii)

not on behlaf of a political party but for the advantage of a political party, it shall be
deemed to be a contribution for a political purpose.

Question 34
Mr. X is a director of M/s ABC Ltd. He has approached M/s Housing Finance Co. Ltd. For the
purpose of obtaining a loan of ` 50 lacs to be used for construction of building his residential
house. The loan was sanctioned subject to the condition that M/s ABC Ltd. should provide the
guarantee for repayment of loan instalments by Mr. X. Advise Mr. X.
Answer
According to section 185 of the Companies Act, 2013, no company shall, directly or indirectly,
advance any loan, including any loan represented by a book debt, to any of its directors or to
any other person in whom the director is interested or give any guarantee or provide any
security in connection with any loan taken by him or such other person.
Thus, Mr. X is not allowed for loan of Rs. 50 Lacs by the company ABC Ltd.
Question 35
Mr. X is a director of several companies. He has approached the following companies in which
he is a director for financial help to start his own personal business.
(i)

Expandable Industries Ltd.

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5.30
(ii)

Corporate and Allied Laws


Expensive Gadgets Private Ltd.

(iii) Easy Finance Ltd.


The first named company has agreed to grant a loan of ` 50 lakhs. The second company also
offered another loan of ` 50 lakhs .The third company has agreed to provide guarantee for the
repayment of a loan sanctioned to Mr. X by a Private Bank to the tune of Rupee One crore.
Advise Mr. X about the legal provisions that should be complied with under the Companies
Act, 2013 and the consequences if there is a non compliance.
Answer
According to section 185 of the Companies Act, 2013, no company shall, directly or indirectly,
advance any loan, including any loan represented by a book debt, to any of its directors or to
any other person in whom the director is interested or give any guarantee or provide any
security in connection with any loan taken by him or such other person.
In all the three types of companies, loan or guarantee to Mr. X is not allowed. Further, If any
loan is advanced or a guarantee or security is given or provided in contravention of the above
provisions, the company shall be punishable with fine which shall not be less than five lakh
rupees but which may extend to twenty-five lakh rupees, and the director or the other person
to whom any loan is advanced or guarantee or security is given or provided in connection with
any loan taken by him or the other person, shall be punishable with imprisonment which may
extend to six months or with fine which shall not be less than five lakh rupees but which may
extend to twenty-five lakh rupees, or with both.
Question 36
Mr. KMP is director of XLS Ltd. He intends to construct a residential building for his own use.
The cost of construction is estimated at ` 1.50 Crores, which Mr. KMP proposes to finance
partly from his own sources to the tune of ` 60 lacs and the balance ` 90 lacs from housing
loan to be obtained from a housing finance company. For the purpose of obtaining the loan, he
has approached the housing finance company which has in principle agreed to grant the loan,
but has put a condition. The condition put by the housing finance company is that the
Company XLS Ltd. of which Mr. KMP is a director should provide the guarantee for repayment
of the loan and interest as per the terms of the proposed agreement for granting the loan to
Mr. KMP. You are required to advise Mr. KMP on the matter with reference to the provisions of
the Companies Act, 2013.
Answer
According to section 185 of the Companies Act, 2013, no company shall, directly or indirectly,
advance any loan, including any loan represented by a book debt, to any of its directors or to
any other person in whom the director is interested or give any guarantee or provide any
security in connection with any loan taken by him or such other person.
Thus, guarantee by Company XLS Ltd. of which Mr. KMP is a director, for repayment of the
loan and interest as per the terms of the proposed agreement is not allowed.

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Meetings of Board and its Powers

5.31

Further, If any loan is advanced or a guarantee or security is given or provided in


contravention of the above provisions, the company shall be punishable with fine which shall
not be less than five lakh rupees but which may extend to twenty-five lakh rupees, and the
director or the other person to whom any loan is advanced or guarantee or security is given or
provided in connection with any loan taken by him or the other person, shall be not be less
than five lakh rupees but which may extend to twenty-five lakh rupees, or with both.
Question 37
Mr. DRT is a director of PCS Ltd. The said company is having sufficient liquid funds and Mr.
DRT is in dire need of funds. In order to mitigate the hardship of Mr. DRT the board of
directors of PCS Ltd. wants to lend ` 5 lakhs to him and ` 2 lakhs to his wife. State whether
such loans can be given and if so under what conditions. What would be your answer if the
company PCS LTD would have been PCS Private Ltd.
Answer
Loan to Director and his relative: According to section 185 of the Companies Act, 2013, no
company shall, directly or indirectly, advance any loan, including any loan represented by a
book debt, to any of its directors or to any other person in whom the director is interested or
give any guarantee or provide any security in connection with any loan taken by him or such
other person.
Thus, in the instant case, if PCS Ltd. wants to lend ` 5 Lakhs to Mr. DRT who is a director in
PCS Ltd. and ` 2 Lakhs to his wife, then it is in violation of section 185 of the Companies Act,
2013.
It does not matter that PCS Ltd would have been PCS Private Ltd. as Section 185 of the
Companies Act, 2013 is applicable to both Public and Private companies.

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